Best Guide to Porter’s 5 Forces Analysis
What are porter’s 5 forces?
In 1979, Michael Porter of Harvard Business School developed a simple framework with the name porter’s 5 forces that could be used by organizations that wanted to increase their profitability while understanding the competitive forces that surround them.
The theory and framework revolve around the idea that five competing forces at play determine how competitive and lucrative a particular industry is.
Organizations use the porter 5 forces framework to determine how well a new product would perform in a particular industry. Threats that must be countered or avoided, strengths that need to be capitalized on, and weaknesses that must be corrected are all things that become relatively clear after doing a porter 5 forces analysis.
Why are porter’s 5 forces so popular?
Having a deep and thorough understanding of an industry and the competition within it is essential for all manner of business leaders and organizations as a whole.
If you are a business that wants to grow and further increase and cement your presence in your industry, it will make sense for you to be in a constant state of research and reflection.
What are the areas that your business might benefit from by improving? Do you think your business is doing enough to stay competitive in the short and long term? Are there any external or internal threats within your industry that will leave you on the corner of your seat?
Finding these questions is made a lot easier by models like the porter 5 forces, SWOT, etc.
Here is a guide to porter’s 5 forces analysis:
What are the five forces?
Here are the forces in porters 5 forces:
- Competitive rivalry.
- Power of sellers.
- Power of buyers.
- Threat of substitution.
- Threat of new entrants.
Let’s discuss each force in detail:
In life and consequently, in business, you cannot avoid competition.
To ensure that your company is aware of and able to counter your competition, you will need to ensure that you keep a tab on your competition.
Competitive rivalry looks at the number of competitors in your industry, as well as the strength, experience, and resilience of your competition.
To really make sense of your competition, you will need to do a fair bit of research on them. What are their short-term and long-term goals? What do you know about their direct suppliers and broader supply chain? Their strengths, weaknesses, unique selling points, and bottom line are that you need to know everything about them.
If there is high competition in your particular industry, you will need to be vary and be ready to punch it out in the business arena.
In many scenarios, high competition means that there is either market demand that needs to be met or a too-high entry barrier. Both of which can indicate that the industry has the potential to make companies extremely profitable.
Low competition generally is more favorable as companies won’t have to spend their time trying to compete with other rivals. You might want to consider and ponder why there is no competition in a particular industry. Are there barriers that stop companies from making an entry?
Gather as much useful information as you can about your competition, and you will come to see it playing a crucial role in your own decision-making process.
Powers of suppliers.
Most businesses rely on other suppliers or providers to facilitate their operations and make running their business possible.
In porter’s 5 forces, you should not take lightly or overlook the power of suppliers.
The power suppliers hold in any industry is determined by their numbers and the availability of their supplying article.
To make your products or services a reality, you depend on your suppliers. If they choose to increase their prices, that will directly impact your business.
You might even consider increasing the price of your offerings. This will affect your relationship with your target audience. It will also put a burden on your standing, and competitors will be keen to take advantage of any weakness.
Another option on the table in this scenario might be to not pass on the effects that the supplier has caused. This means that your business’s profit will take a hit, but at least you won’t give on the ill-effects to your audience.
Finding a new supplier is also an option that you can consider. However, suppose your company is situated in an industry with a limited pool of suppliers that dominate the collective raw materials. In that case, it might not be entirely possible for you to avoid the demands of the suppliers.
Power of buyers.
Like the power of suppliers, buyers’ power is another critical force that all businesses should consider.
The power of buyers can be described as the ability of buyers to lower your product’s prices. Since all businesses depend on the users and buyers of their offerings, it would have an extraordinary impact on the company if the buyers decided they wanted lower prices one day.
The company in this organization might consider lowering prices. But this will impact the organization’s profitability significantly.
Not lowering prices can also have an adverse effect. Some buyers will quickly start to look for alternatives to your business. Naturally, this will have a negative impact on your business.
Not to mention the bad press that comes in today’s world if you ignore the mood and desire of your audience. These days, organizations need to find a way always to keep their buyers happy. Otherwise, they will be sure to hear of it on social media and in the press.
Another thing that organizations can do is find ways to lower their costs, thereby providing the relief that their buyers demand. But something like this is much easier said than done.
Threat of substitution.
The threat of substitution is one of porter 5 forces that focuses on your audience’s likelihood of finding an alternate or something better than your offerings. Your organization needs to be aware of is how vulnerable your offerings are when it comes to being replaced by its users.
Think about it. What will you do if, one day, your audience finds a better way of doing things or the need for your product quickly starts declining?
Being aware of these kinds of threats is essential.
If you feel that a new product has the potential to substitute and outdo the functionality and benefits of your product, then you might need to intervene as soon as possible.
Consumer behavior also tends to change with the times. What people perceived as truly valuable once might later have resorted to something that people don’t give a second thought to.
It doesn’t take too long for things to change in our modern world, and your product is deemed redundant. To make sure that this doesn’t happen, you will need to ensure that you’re keeping up to date with the latest industry practices and focusing on the current needs of your buyers.
Threat of new entrants.
The final force in porters 5 forces is the threat of new entrants.
In any industry, new companies and organizations can always enter. This can definitely impact your organization and its financial bottom line.
If new entrants cannot make standing in your industry, it might make sense for you to cement yourself if you’re already an established player.
But if you’re planning on entering a market that is well known for thrashing new entrants, then you might want to re-evaluate the pros and cons. With adequate capital and management, it might be feasible for you to enter this market.
Starting a new business or getting into any market is almost always challenging. You will have to face several issues ranging from financial matters to sourcing issues, internal threats, and obstacles and outer ones.
And if you are already a key player in your industry, you always need to be on the lookout for any organization that’s making moves that might put your company at risk, or worse, out of business.
Advantages of porter’s 5 forces:
Conducting research is essential to business success. Without putting in the adequate time and resources into studying your industry, your competition, and threats, you will not be able to compete.
With the help of the porters 5 forces framework, you get a complete picture of your business’s environment.
From understanding the factors that might affect your business to how your business can take advantage of specific opportunities, many things become apparent thanks to porters 5 forces.
When utilized correctly, you get many detailed insights into things that most people would have only a surface level knowledge or understanding about.
Future planning becomes a lot more precise thanks to porters 5 forces. Since you’re evaluating a lot of variables and factors before making a decision, you will end up choosing a path that would logically be the best choice for your business.
Disadvantages of porters 5 forces:
No model is forever correct. As time passes by, and as things and environments change, the efficacy of a model is bound to change as well.
One main criticism of the porter 5 forces model is that it is a surface level model. What that basically means is that the model serves as a good starting point for research, but it might not be advantageous if you are interested in getting deeper, actionable insights.
Another thing that makes the model a poor choice is that it is not suited well for complex organizations. These companies are present in different industries simultaneously and face all manner of threats, internal and external.
The porters 5 forces are thought to be static. Meaning that the model does not consider the dynamic nature of the business, aka, partnerships being formed between different suppliers, buyers, new entrants, etc.
Limitations of porter 5 forces:
Like most models or frameworks, several things limit the usability and correctness of porters 5 forces.
First off, the framework only sees things as they are at the moment. This means that future predictions and implications cannot be determined using the information being currently fed into the model.
Another crucial factor that the model does not consider is regulations by the governments and other regulatory authorities and how their policies will ultimately impact organizations and businesses’ bottom line.
These points, coupled with the fact that the model does not consider the nature of the modern business, meaning that a single organization can have its hands in several different fields to do the work they are doing, makes for a model that might not be best suited to the businesses of today.
Porter’s 5 forces have stayed relevant, albeit in varying proportions, since Michael Porter first introduced them.
There are a lot of things that decision-makers and business leaders can learn from porters 5 forces. Starting to think about the forces and factors outside of your organization is the first step to making sure that your decisions are informed and have sound reasoning behind them.
Although times have changed and the world is not the same, you can still incorporate the porter 5 forces model into your broader decision-making process.